Commentary on Economics, Information and Human Action

Elementary error misleads APPA on electricity pricing in states with retail electric choice

The American Public Power Association (APPA) recently published an analysis of retail power prices, but it makes an elementary mistake and gets the conclusion wrong.

The APPA analysis, “2014 Retail Electric Rates in Deregulated and Regulated States,” uses U.S. Energy Information Administration data to compare retail electric prices in “deregulated” and “regulated” states. The report itself presents its analysis without much in the way of evaluation, but the APPA blog post accompanying its release was clear on the message:

… after nearly two decades of retail and wholesale electric market restructuring, the promise of reduced rates has failed to materialize. In fact, customers in states with retail choice programs located within RTO-operated markets are now paying more for their electricity.

In 1997, the retail electric rate in deregulated states — the ones offering retail choice and located within an RTO — was 2.8 cents per kilowatt-hour (kWh) higher than rates in the regulated states with no retail choice. The gap has increased over the last two decades. In 2014, customers in deregulated states paid, on average, 3.3 cents per kWh more than customers in regulated states.

But the APPA neglects the effects of inflation over the 17 year period of analysis. It is an elementary mistake. Merely adjusting for inflation from 1997 to 2014 reverses the conclusion.

The elementary mistake is easily corrected: Inflation data can be found at the St. Louis Fed site. Using the 2014 value of the dollar, average prices per kwh in the APPA-regulated states were 8.4 cents in 1997 and 9.4 cents in 2014. In the APPA-deregulated states the average prices per kwh were 12.5 cents in 1997 and 12.7 cents in 2014.

Prices were up for both groups after adjusting for inflation, but prices increased more in their regulated states (1 cent per kwh, so up about 11.3 percent) than in their deregulated states (0.2 cents; up about 1.4 percent). The inflation-adjusted “gap” fell from nearly 4.1 cents in 1997 to 3.3 cents in 2014.

ADDENDUM

Surprisingly, the APPA knows that an inflation adjustment would change their answer. The report ignores the issue completely; the APPA blog said:

For example, a recent analysis by the Compete Coalition finds that, after accounting for inflation, rates in restructured states decreased by 1.3 percent and increased by 9.8 percent in regulated states since 1997. The data in the APPA study, which does not account for inflation, show that rates in the deregulated states grew by 48 percent compared to a 62 percent increase for the regulated states.

However, a percentage-based comparison obscures the important fact that the 1997 rates in deregulated states were much greater than those in regulated states.

The remaining differences between my inflation-adjusted APPA values and those of the Compete Coalition likely arise because Texas is in the Compete Coalition’s restructured states category, but not in the APPA’s deregulated states category. Seems an odd omission given that most power in Texas is sold in a quite competitive retail power market. APPA does not say why Texas is excluded from their deregulated category.

According to EIA data [XLS], average power prices in Texas were 9 cents per kwh in 1997, but in 2013 had fallen to 8.7 cents. Both numbers have been adjusted for inflation using CPI-U values from the St. Louis Fed website and reported using the 2014 value of a dollar. The 2013 numbers were the latest shown in the EIA dataset.

Well that would not be the most polite way to state it. Also, just possibly the APPA simply does not understand the value of the inflation adjustment even though they mention the issue. However, this alternative view may be an even less polite view.